Spending on infrastructure seems good… But it isn’t

Infrastructure spending can be of great benefit to the economy. But it is quite unfortunate that the type of “spending” proposed by the Democrats will not benefit the economy.

For clarity’s sake, let us start our conversation with the definition of “infrastructure”

Infrastructure is the general term for the basic physical systems of a business, region, or nation. Examples of infrastructure include transportation systems, communication networks, sewage, water, and electric systems. These systems tend to be capital intensive and high-cost investments, and are vital to a country’s economic development and prosperity.(Investopedia)

Let us continue by breaking the above definition down into its most important components:

■Basic Physical Systems

■Transportation system, Communication networks, Sewage, Water, and Electric systems

■Capital Intensive

■High-Cost Investments

The last component is the most significant – “investments.”

According to Economists, an investment is the use of an existing resources to create an additional income.

So, a well acceptable definition of infrastructure is:

An investment into the basic physical systems of the nation with the goal of generating income to pay for the capital intensive expenditure.

As Fortune recently said:

Like all humongous-scale legislative efforts, the Biden administration’s new $2.2 trillion infrastructure plan contains surprises—unrelated provisions that are hitching a ride on a juggernaut. In this case, they’re not like barnacles on a giant ship. Some of these surprises are surprisingly large.

At present, there is a very small bipartisan infrastructure bill in the pipeline. Meanwhile, Democrats seek to deploy the “reconciliation” process to pass the full “social spending plan” mentioned above.

“The Senate may work into its August recess to pass both a bipartisan infrastructure plan and a budget resolution that would allow Democrats to enact a range of priorities without Republican support, Senate Majority Leader Chuck Schumer said recently.

According to CNBC, in a letter written by the New York Democrat to his caucus, Schumer said senators were collaborating with White House to turn the $1.2 trillion infrastructure structure into legislation. The Senate Budget Committee is also putting in place a measure that would permit Democrats to pass into law a sprawling child-care, health-care and climate policy arrangement without a GOP vote.

Irrespective of which bill passes, our general focus is on “infrastructure” spending.

Debt And Additional Debt

As the Cato Institute explained about the original bill.

It moves entirely in the wrong direction by increasing subsidies and centralizing power. A better approach would be to end federal subsidies and decentralize infrastructure ownership and decision making.

Notwithstanding, one of the important points ignored by both the Cato Institute and Heritage Foundation is the total plan must be funded by debt expansion.

Now, let’s go back to our definition of “infrastructure.”

Since the outset of the pandemic-induced economic closedown, Government’s intervention has been through massive debt expansion. It was hoped that the increase in debt would prevent the economy from sliding into an economic recession that is deeper.

But debt was already increasing sharply since President Obama assumed office in 2009. The irony of the situation is that the lingered expansion of government interventions did not bring about an organic economic growth. On the contrary, the more the debt moved up, the more debt it incurred to keep afloat the weak economic growth rates.

Debt-Growth Analysis

As said above, since debt must be used to fund “infrastructure” spending, the debt must be self liquidating. This means that every project must produce a stream of revenue through fees, taxes or duties, to payback the debt-funded capital investment over time.

Dr. Brock, an economist who possesses 5-degrees in Math and Economics, and doubles as the author of “American Gridlock” explained this succinctly with the below example of two countries.

Country A expends $4 Trillion with $3 Trillion receipts. By implication, Country A is left with a $1 Trillion deficit. In a bid to offset the difference between the spending and the income, the country must incur $1 Trillion new debt. The new debt is used to augment the excess expenditures, but yields no income, thereby creating a future gap that must get filled.

Country B expends $4 Trillion and gets $3 Trillion income. Meanwhile, the excess of $1 Trillion which was financed by debt is invested into projects, infrastructure, that yields a positive rate of return. So, there is no deficit because the rate of return on the investment funds the “deficit.”

There is no discrepancy about Government’s need to spend. The disagreement has to do with its abuse and waste.

Social Welfare And Infrastructure Are Not The Same

For debt-funded spending of the government to be effective, the “payback” from investments created with debt must produce a higher rate of return than the debt used for funding the investment. Though Joe Biden’s plan has an iota of investment, it is just social welfare.

As Dr. Brock noted, there is a paradigm shift of government spending from productive investments, like the Hoover Dam investment which creates jobs (infrastructure and development) to social welfare and debt service, but has a negative rate of return.

As revealed in “Biden’s Stimulus Won’t Solve Poverty:”

According to the Center On Budget & Policy Priorities, in 2020, roughly 75% of every tax dollar went to non-productive spending.

In the fiscal year 2019, the Federal Government spent $4.4 trillion, amounting to 21 percent of the nation’s gross domestic product (GDP). Of that $4.4 trillion, federal revenues financed only $3.5 trillion. The remaining $984 billion came from debt issuance. As the chart below shows, three major areas of spending make up most of the budget.’

Think about that for a minute. In 2019, 75% of all expenditures went to social welfare and interest on the debt. Those payments required $3.3 Trillion of the $3.5 Trillion (or 95%) of the total revenue collected.

Given the decline in economic activity during 2020, those numbers become markedly worse. As a result, for the first time in U.S. history, the Government will issue debt to cover mandatory spending.

As Dr. Brock explained above, the U.S. happens to be now “Country A.” 

“Today we are borrowing our children’s future with debt. We are witnessing the ‘hosing’ of the young.’” – Dr. Brock

Infrastructure Will Not Grow The Economy

Though the administration of Biden promises the “infrastructure” plan will offer jobs and grow the economy, in reality, it won’t.

As Mises Institute noted:

There is a fallacy that government spending, on infrastructure or anything else, creates jobs or economic growth in the aggregate. Murray Rothbard addressed the issue in great detail in his article ‘The Fallacy of the Public Sector.’’ In summary, there is no such thing as the Infrastructure Fairy that takes government spending and magically turns it into economic growth.

As the Mises Institute explains, Government spending is    a “zero-sum” game given the money gets borrowed and gets repaid via collection of taxes.

The money spent on infrastructure must get borrowed, taxed, or printed (a tax not called a tax) out of the non-government economy. One minus one equals zero. That’s not conservative economics or liberal economics. It’s not Democrat economics or Republican economics. It’s just economics.

As depicted, there is no proof that additional money incurred and spent by the Government will bring about more robust economic prosperity.

A Diversion

The major issue with the proposed “infrastructure” spending is that the spending diverts jobs and investment away from the country’s  private sector.

While talking about the diversion, Cato Institute said:

The Tax Foundation found that Biden’s proposed tax increases would reduce private investment by more than $1 trillion. In addition, Biden’s proposed green and labor union regulations would further undermine infrastructure investment.

Corporations are already investing in activities favored by the Biden administration, such as electric vehicles, renewable energy, and broadband. Rather than subsidizing, Biden should reduce regulatory barriers to infrastructure investment and cut corporate taxes to increase investment incentives.

If we dig deeper into the realities behind government spending, however, we can see that an ‘infrastructure stimulus program’ would probably make matters worse than they are. After all, private investment is made with the goal of producing something that consumers want to buy, at a price that will generate a profit. These activities, if successful, would enable continued reinvestment in the same enterprise, and continued employment of the individuals therein.

Through taxation, the government manufactures something that the consumers have not already decided to purchase. If they were already manufacturing and purchasing such things, government intervention will not be “necessary.” 

The Solution

The answer here is to give allowance to private sector to perform it’s function: efficient allocation of capital for profitable outcomes.

“We would get a real revolution in infrastructure by adopting reforms from abroad to privatize passenger rail, airports, seaports, air traffic control, water systems, and other facilities. There is no need to subsidize infrastructure if it can be moved out of the government and supported by user fees. Rather than spending $2 trillion, we should privatize infrastructure where feasible and cut taxes and regulations on the rest.” – Cato Institute

There is an easy definition for “infrastructure” that should be adopted by politicians – if tax credit or incentive is required to encourage people to use it, it is not infrastructure. But this is just the long and unprofitable history of the government choosing winners and losers in the economy. If there is a product, need or service, the private sector will discover how to manufacture it profitability. It will die naturally if it is not viable, according to the “Darwinian” nature of capitalism.

However, this lesson is always dismissed by politicians who are more concerned about winning the next election than delivering a prosperous economy for all.

Leave a Reply

Your email address will not be published. Required fields are marked *